This Week in Dairy - Lee Mielke

Lee Mielke is a veteran dairy journalist and broadcaster, currently carried in a dozen Ag newspapers nationally. This column is prepared especially for the readers of DairyBusiness. Based in Lynden, Wash., he can be reached by email at or by phone 360.201.4033

The February 7 Global Dairy Trade (GDT) auction saw its weighted average for all products offered climb 1.3 percent after inching up 0.6 percent January 17, which followed drops of 3.9 percent on January 3 and 0.5 percent December 20.

Buttermilk powder again led the declines, down 7.5 percent, after dropping 10.1 percent January 17. Cheddar cheese was down 3.7 percent, after a 1.3 percent gain. Rennet casein inched 0.4 percent lower, after leading the gains last time.

Butter was up 4.9 percent, after gaining 1.6 percent last time, and anhydrous milkfat was up 4.0 percent, following a 3.7 percent gain. Whole milk powder was up 1.0 percent, following a 0.1 percent slip, and skim milk powder inched 0.1 percent higher, following a drop of 1.6 percent in the last event.

FC Stone equated the average GDT butter price to $2.0324 per pound U.S., CME butter closed Friday at $2.1025 per pound. GDT Cheddar cheese equated to about $1.7227 per pound U.S. and compares to Friday's CME block Cheddar at $1.61. GDT skim milk powder was at $1.1830 per pound and whole milk powder averaged $1.5032 per pound U.S. CME Grade A nonfat dry milk price closed Friday at 92 cents per pound.

Cheese prices fell the week of February 6. Block Cheddar closed the week at $1.61 per pound, down 13 cents but still 12 cents above a year ago, and the lowest price since October 17, 2016. The barrels closed at $1.65, down 5 3/4-cents on the week, 17 cents above a year ago, and an inverted 4 cents above the blocks. Twenty five cars of each traded hands on the week at the CME.

The U.S. Dairy Export Council reports that December cheese exports were up 16 percent from a year ago, highest monthly volume since March 2015. FC Stone says "A lot of the product is thought to have been exported to Southeast Asia, whom normally does a lot of business with Australia. With milk production down in Australia, and not looking to rebound soon, the U.S. has been more than happy to fill in the void."

Fluid milk is readily available for Midwestern cheese producers, according to Dairy Market News (DMN). Some are backing away from buying extra milk while others are considering selling it instead of increasing inventories. Some continue fully active production, matching the abundant milk supply, while others are cutting back to manage growing cheese stocks. Western cheese output is also active, with plenty of milk available and some contacts suggest demand is "caught in a post-Super Bowl lull," but there is interest from export markets.
However, because U.S. cheese prices are still above global prices "exports have yet to fully develop," says DMN.

The butter climbed to $2.1775 per pound Wednesday but faltered Friday, dropping 7 1/2-cents to close at $2.1025, down 5 1/2-cents on the week, three-quarter cents below a year ago, and the lowest spot since December 15, 2016. Twelve cars found new homes on the week at the CME.

HighGround Dairy points out that butter demand from Canada remained elevated into the end of 2016, with 3.5 million pounds shipped from the U.S. in December, a 243 percent increase from 2015.

However, strong U.S. prices were a magnet. The Daily Dairy Report says the U.S. imported a record-breaking 63.5 million pounds of butter in 2016, 21.6 percent more than in 2015 after adjusting for Leap Year. U.S. butter imports dwarfed exports, which totaled just 34.5 million pounds. 2016 butter exports were 7.5 percent smaller than the year before and down 73.5 percent from 2014."

Cream remains readily available for Central butter producers, according to DMN. Sales remain strong by some producers but steady to slower among others. Western butter demand has waned slightly, but contacts still describe it as "good for this time of year," although butter inventories are building.

Cash Grade A nonfat dry milk closed Friday morning at 92 cents per pound, down 2 cents, but 17 cents above a year ago, on 19 carloads sold on the week.

FC Stone's Brendan Curran wrote in his February 9 Insider Opening Bell that "The overall market tone is heavy as ongoing trade tensions with Mexico continues to weigh on the overall psychology of the trade and with another EU tender failing to move skim milk powder out of intervention, the bullish camp will have to play the waiting game for a headline to move on."

"The U.S. missed out on a nonfat dry milk tender to Mexico for the second time in a row, meaning roughly 26.5 million pounds will stay in storage," according to FC Stone. "In the grand scheme of things the volume is a drop in the bucket, but even a small leak can cause a flood over time. It is pure speculation at this point if the decision to go with EU product over the U.S. is politically based, but recently rhetoric between the two countries gives credibility to that argument."

Dairy margins were flat to weaker over the second half of January, primarily due to steady to lower milk prices, according to the latest Margin Watch (MW) from Chicago-based Commodity & Ingredient Hedging LLC.

The MW stated that "From a historical perspective, margins remain above the 90th percentile of the previous decade through the first half of 2017 and well above the 80th percentile through the second half of the year."

"Soybean meal prices eased slightly due to recent rainfall in dry areas of Argentina, and welcome dryness in others, quelling some of the bullish enthusiasm that precipitated a large increase in price. Corn has held steady without much feature in the market. However, recent executive orders from the new Trump administration to renegotiate NAFTA and build a border wall with Mexico have renewed trade concerns. Mexico is the largest importer of U.S. corn, and many tariffs on dairy products were reduced or removed completely under NAFTA," the MW warned.

The Agriculture Department again raised its 2017 milk production forecast in its latest World Agricultural Supply and Demand Estimates report. It stated that improved returns in 2017 are expected to result in a slightly higher forecast cow inventory in late 2017. Milk output per cow was also raised as improved returns are expected to support continued improvements in the quality of dairy rations.

2017 production and marketings were projected at 217.4 and 216.4 billion pounds respectively, up 300 million pounds from last month. If realized, 2017 production would be up 4.9 billion pounds or 2.3 percent from 2016.

"Beginning stocks on both a fat and skim-solids basis were raised from last month based on December 31 storage data; stocks at the end of 2017 were raised, reflecting increased beginning inventories and higher dairy product production in 2017. Fat-basis imports were reduced as domestic butterfat is expected to be more competitive with the EU; skim-solids imports are unchanged. Fat basis exports were unchanged and skim-solids basis exports were raised slightly. Skim-solids imports were virtually unchanged as weaker exports of nonfat dry milk (NDM) are offset with stronger whey sales."

"Milk production, output per cow, trade, and stock estimates for 2016 were updated based on data through December. Cheese and butter price forecasts were lowered as product production is expected to reflect higher forecast milk production and beginning stocks are relatively high. The nonfat dry milk price forecast was unchanged, but the whey price was raised from last month on the strength of domestic and international demand."

The Class III milk price was raised "as the higher whey price more than offsets the lower cheese price forecast." Look for the Class III to average $16.45-$17.15 per cwt. in 2017, up a dime on the low end from last month and compares to $14.87 in 2016 and $15.80 in 2015.

The Class IV price was reduced as the butter price forecast was lowered. It is projected to average $15.10-$15.90 per cwt., down 15-25 cents from a month ago, and compares to $13.77 in 2016 and $14.35 in 2015.

Corn ending stocks were lowered 35 million bushels from last month. The projected range for the season average corn price received by producers was narrowed 10 cents on each end to $3.20 to $3.60 per bushel, with the midpoint unchanged at $3.40, according to the USDA.

FC Stone's Dave Kurzawski comments in his February 3 Early Morning Update about the January Cattle report. He wrote that "It isn't a closely followed report in the dairy world, but it is the most comprehensive head count the USDA does for cattle on an annual basis and it creates a calibration point that the USDA uses for their monthly and quarterly dairy cow estimates for the rest of the year."

The most interesting piece of data in the report, according to Kurzawski, is "the milk cow replacements, expected to calve" line item. "This is the supply of heifers that will be coming into the dairy herd during the calendar year. Heifers expected to calve for 2017 were estimated down 1.3 percent (down 40,000) from 2016, however that is down from a record high in 2016. The 2017 estimate is still the second highest on record (data only goes back to 2003)."

"Feed costs are moderate and margins have been decent and look good (at least based on futures) going forward," Kurzawski states. "It's possible that with beef prices down farmers are planning to slow their slaughter rate down and decided they needed fewer replacements on hand. Another possibility is that the drop is due to processing constraints/local issues. The USDA doesn't give a state level breakout for 'expected to calve,' but based on the state level breakout for 'All (dairy) heifers 500 pounds and over,' it looks like the heifer supply in Wisconsin, Minnesota, and Michigan is down, which might be driven by processing capacity issues. Although Washington, Oregon, and Idaho heifers are also down, and we don't have a good explanation for that," he said.

Bottom line; "The number of heifers expected to enter the dairy herd is down 1.3 percent for 2017. By itself it doesn't mean much. What matters now is the pace of slaughter. The slightly diminished heifer supply is a very mild headwind to dairy cow growth in 2017, but not a concern at this point," he concludes.

The American Farm Bureau Federation has unveiled what they call a Dairy Revenue Protection plan as a possible replacement of the current Margin Protection Program (MPP). Fewer and fewer producers are using the MPP. The proposal is viewed as similar to the Livestock Gross Margin Dairy Program.

The California Department of Food and Agriculture (CDFA) released its 2015 manufacturing cost study. The Milk Producers Council's Geoff Vanden Heuvel wrote in his January 27 member newsletter that the survey of California's manufacturers shows the 2015 average cost to make nonfat dry milk and cheese inched up by about a half cent per pound of product over the 2014 study averages while the butter manufacturing cost was nearly unchanged from 2014.

"The current class 4a formula make allowances were set in 2011," according to Vanden Heuvel. "The allowance currently used for butter is 16.35 cents per pound. CDFA's surveyed cost to make butter in the recent study was 18.42 cents per pound. The formula make allowance for nonfat dry milk is 17.63 cents per pound. CDFA's surveyed cost to make nonfat in the study was 20.78 cents. The block cheddar cheese make allowance was last changed in 2007 and is 19.88 cents per pound. CDFA's surveyed cost of manufacturing block cheddar cheese in 2015 was calculated at 23.94 cents per pound."

He admits there are "pretty big gaps between the current formula make allowances and costs reported in CDFA's study," and adds that the FMMO make allowance for butter is 17.11 cents per pound, the nonfat dry milk make allowance is 16.78 cents, and the cheese make allowance is 20.03 per pound.

He adds that "This is not the whole story with regards to whether our current formulas are where they should be. The formulas are based on commodity dairy products (and for cheddar cheese and butter, those sales are for large lots sold at bulk prices on the Chicago Mercantile exchange)."

"Profit opportunities for the plants lay in making and selling dairy products that bring higher sales prices than the basic commodity values that are embedded in the minimum pricing formulas. There are also other parts of the formula that are subject to debate. But clearly processors are interested in making changes to these formulas whenever conditions will allow it," he warned.

Processors did just that via the Dairy Institute of California which filed a hearing petition, requesting changes to the Class 4a & 4b pricing formulas. The Department must either grant a hearing or deny the petition by February 21.

The requested changes, if granted, would mean less money for California dairy producers but they may receive a Valentine's Day gift as it was reported February 9 that a Recommended Decision will be handed down February 14 that proposes the issuance of a Federal Milk Marketing Order (FMMO) for California, based on The Recommended Decision is based on a public hearing held in Clovis, California from September to November 2015.

The proposed FMMO incorporates the entire state and would adopt the same dairy product classification and pricing provisions used throughout the current FMMO system. "The proposed FMMO provides for the recognition of producer quota as administered by the CDFA. This proposed rule also announces the Agricultural Marketing Service's (AMS) intent to request approval by the Office of Management and Budget (OMB) of new information collection requirements to implement the order," according to the Federal Register. AMS will hold a public meeting on February 22, 2017, in Clovis to explain and answer questions about how the proposed California FMMO would operate.

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